Budapest has endured three difficult bond auctions in a week, yields have shot up, and the forint has tumbled. That, in turn, is fuelling inflation and increasing the pain for hundreds of thousands of Hungarians who took out mortgages in foreign currencies when the forint was much stronger.
Fitch and Standard & Poor’s shifted their credit outlook for Hungary, rated on the lowest investment grade, to negative – making a downgrade to junk status appear only a matter of time. With the highest government debt among central and east European countries, Hungary has seen credit flows slow as investors have fled risk and the growth outlook for its biggest market – the eurozone – has darkened.
There are now fears that Hungary’s predicament could foreshadow a new wave of contagion to CEE countries, which were particularly badly hit by the 2008 financial crisis.
Hungary’s centre-right Fidesz government is nonplussed. It says it has worked hard to control the budget deficit, targeting 2.5 per cent of GDP next year, and started reducing government debt from the 80 per cent of GDP inherited from the previous administration. “We are not Greece”, says Zoltan Kovacs, a government communications minister. “We suspect some speculative steps behind this. It is not justified at all.”
To ease pressure on the forint, Hungary must raise interest rates, use reserves to defend the currency, or return to the IMF. The central bank on Tuesday indicated it might “gradually” tighten monetary policy from the current 6 per cent, but Citigroup warned this would be a “shot in the head” for the economy.
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